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Brazil: Sun, Samba And A Healthy Economy?

May 03, 1998

International Business: BRAZIL

BRAZIL: SUN, SAMBA--AND A HEALTHY ECONOMY?

With inflation tamed, Brazilian business has a whole new look

Chief Executive Americo Emilio Romi Neto strides through the sprawling factory of his family company, Industrias Romi. Located in Santa Barbara d'Oeste, a town 100 miles north of Sao Paulo, Romi has been turning out machine tools since 1943. For years, the company mostly served Brazil's sheltered market. Now, it churns out computerized lathes for customers in Europe as well as in the U.S. Profits soared to $51.8 million last year, up 30%, on sales of $159 million. "The whole business climate in Brazil is different now," says Romi, 42. "If you sell in only one market, it's hard to survive."

Romi is just one of hundreds of companies that epitomize the new shape of Brazil's $800 billion economy, the world's eighth-largest. Businesses are thriving in the environment created by Brazil's clampdown on inflation in the mid-1990s, after the country opened its market to the world. From banks to poultry processors, companies are ratcheting up productivity as the economy shifts from boom-and-bust cycles to steadier, longer-term growth.

Some, such as Banco Itau, Brazil's No.2 commercial bank, and steelmaker Usiminas, are also expanding beyond Brazil's borders and becoming major South American players. Foreign investment is pouring in, too. This year, Brazil is expected to attract a record $20 billion in direct investments from abroad, such as the $1.6 billion it got for cellular-phone licenses in April from groups including Bell Canada and Motorola Inc. Portfolio managers worldwide are snapping up Brazilian stocks, especially the already traded minority shares of state companies on the privatization block, such as telecom giant Telebras.TRAINING. This Brazil is not the gaudy highflier it was in the 1970s and 1980s, when its fast growth was undermined by runaway inflation. Today, Brazilians believe they can focus more on structural problems such as inadequate schools. For the first time, many workers are able to buy consumer goods out of wages that inflation used to devour. Businesspeople, too, are starting to believe that work counts for more than beating the system.

Instead of juggling short-term funds, as they did when inflation was 40% a month, executives are pumping more into technology and worker training. Some companies send employees to study in MBA programs in the U.S. Thanks to the government's effort to slash red tape, corruption is diminishing. "Brazil is going through a big cultural change," says Roberto Setubal, president of Banco Itau. "There is a concern with efficiency that didn't exist before."

Oddly enough, the Asian financial turmoil that threatened to trigger a run on Brazil's currency last fall has instead cast Latin America's largest market in a more favorable light. The government's goal of moderate growth that businesses once griped about is now considered a virtue by many. President Fernando Henrique Cardoso's hands-off policy toward business is also seen as a breath of fresh air, compared with the way Asian rulers meddled in their economies. With Asia unsettled, Brazil's market of 160 million people looks more inviting to multinationals seeking high returns. "If investors analyze the size of market, economic stability, and political stability, Brazil now becomes more attractive than Asia," says Jose Luiz Saicali, a partner at KPMG Peat Marwick in Sao Paulo.A LESSON. Brazil could still be vulnerable to another outside shock because its currency, the real, is considered at least 10% overvalued. But Cardoso's handling of the economy after Asia's crash served as an emerging-market lesson on how to turn a crisis to advantage. Shunning a devaluation, the Central Bank doubled the basic interest rate, to 43%, to discourage speculation against the real. Cardoso prodded Congress to act on reforms that will help trim the budget deficit, and he pushed through $18 billion in spending cuts and tax hikes.

Although growth will slow to 1.5% this year, down from 3% in 1997, Cardoso's decisive response is enabling Brazil to recover sooner than expected. Interest rates have fallen to 23.3%, close to their pre-Asia level of 21%, and growth in gross domestic product could rebound to 3% to 4% next year. Currency reserves, after a dip, climbed to a record $70 billion by Apr. 21, $10 billion more than before the crisis.

Cardoso, a former socialist who took office as President in January, 1995, will still face thorny problems if he wins a second four-year term in October. The economic slowdown has pushed joblessness to 7.4%, up from 5.5% a year ago. Government spending will have to be cut sharply to reduce the budget deficit, which was 5.9% of GDP last year. Even if Congress approves social security reform, as expected, it needs to go further to set up a Chilean-style private pension-fund system to raise Brazil's paltry savings rate of 16% of GDP.

Nevertheless, Brazil's steady performance is reinforcing its clout as Latin America's biggest power. This role was dramatized at the Apr. 18-19 Summit of the Americas, a gathering of 34 Presidents and Prime Ministers, including President Clinton, in Santiago, Chile. The summit agreed to launch talks for a Free Trade Area of the Americas, which would go into effect in 2005. But as leader of Mercosur--a regional trade bloc with a combined GDP of $1.1 trillion--Brazil is the dominant force in trade initiatives in the region right now.

From Santa Catarina state in Brazil's prosperous south to Salvador in the poor northeast, Brazilians' growing self-confidence is visible. In Sao Paulo's trendy outdoor Bar des Arts cafe, bankers and executives discuss deals over a caipirinha, Brazil's rum-based cocktail. Along Sao Paulo's Pinheiros River, prospective first-time car owners kick the tires of used autos offered on stable credit terms that didn't exist a few years ago.REAL PROGRESS. All this is the payoff from the anti-inflationary Real Plan launched by Cardoso as Finance Minister in 1994. It combined measures to stabilize the real with other free-market reforms and should hold inflation to just 3.5% this year, down from 940% in 1994.

Confidence is spurring a new wave of foreign investment. Foreign companies are making Brazil the main platform for their South American operations. For example, Ford Motor Co., with Brazilian sales that soared 52% last year, to 280,000 cars, announced in March that it would invest a further $1 billion in Brazil by 2000. That comes on top of $2.5 billion already planned.

Meantime, local companies are reshaping themselves for a more competitive era. Votorantim Group, a cement-and-paper producer with $4.2 billion in sales, is investing $430 million this year in software to integrate business systems. Last year, investors snapped up Eurobond issues of $150 million each by cement maker Votorantim Cimentos and publicly traded paper producer Votorantim Celulose e Papel (VCP), after VCP restructured. VCP turned a $16.1 million profit on sales of $633 million, after a $21.8 million loss in 1996.

Although Brazilians worry about rising unemployment as companies restructure, the working poor are among the greatest believers in the changes that have come to the country. An estimated 30 million people have entered the consumer class in recent years. One is Severino Joaquim da Silva, who earns $550 a month working at a Sao Paulo bakery. Before, "you left most of your salary in the supermarket," he says. But in the past few years, he has bought a used car, stereo, TV, refrigerator, and furniture on payment plans of up to 15 months.

Da Silva is emblematic of Brazilians' new outlook. He's determined and willing to work hard because he believes he's on course toward a better life. For da Silva and many other Brazilians, there's no looking back.By Ian Katz in Sao PauloReturn to top